- 26
- April
What Is LIFO? — And Why IFRS/TFRS Banned It in 2003
In an accounting class, students always learn three inventory costing methods together: FIFO, LIFO, and WMA. But when they enter the workforce in Thailand they discover that most ERP systems do not even offer LIFO as an option — because TFRS (and IFRS globally) banned it nearly two decades ago. This article explains what LIFO is, what happens when you use it, and why the world has progressively phased it out.
Quick Summary: LIFO (Last In, First Out) is an inventory costing method that assumes the most recently purchased lot is sold or used first. Under inflation it produces high COGS, low profit, and low tax — the reason the United States still keeps it under US GAAP. But IFRS banned LIFO in 2003, and Thailand's TFRS (TAS 2) followed suit, because LIFO does not reflect real inventory flow, distorts the Balance Sheet, and opens a door to year-end profit manipulation.
What Is LIFO?
LIFO (Last In, First Out) is an inventory costing method that assumes the most recently received lot is sold or issued first, leaving older lots sitting in stock. This is the opposite of FIFO (First In, First Out), where the oldest stock is sold first, and different from WMA, which averages costs on every receipt.
The everyday analogy closest to LIFO is a "stack" — like plates piled in a cupboard. The plate placed on top is the first one taken; the plate at the bottom has been there the longest.
The LIFO Formula
Inventory On Hand = Cost of the Oldest Lots That Have Not Been Issued
When a sale occurs, the system "draws down" from the most recent lot first. Once the latest lot is exhausted, it works backward through earlier lots in reverse order.
Worked Example — FIFO vs LIFO vs WMA Under Inflation
Suppose a construction-materials store starts the month with 100 bags of cement @ 150 THB, then has two purchases at rising prices, then sells 100 bags:
| Date | Transaction | Qty × Price | Total Value (THB) |
|---|---|---|---|
| Apr 1 | Opening | 100 × 150 | 15,000 |
| Apr 10 | Purchase Lot A (inflation) | 100 × 180 | 18,000 |
| Apr 20 | Purchase Lot B (more inflation) | 100 × 220 | 22,000 |
| Apr 30 — Sell 100 bags @ 250 each → Revenue 25,000 | ? | ||
COGS for the 100 bags sold under each method:
| Method | Lot Used | COGS | Gross Profit | Inventory On Hand |
|---|---|---|---|---|
| FIFO | Oldest lot (Apr 1 @ 150) | 15,000 | 10,000 | 200 × newer prices ≈ 40,000 |
| WMA | Average: (15,000+18,000+22,000) ÷ 300 = 183.33 | 18,333 | 6,667 | 200 × 183.33 ≈ 36,667 |
| LIFO | Newest lot (Apr 20 @ 220) | 22,000 | 3,000 | Old layers stay: 100×150 + 100×180 = 33,000 |
Two Things to Notice
- LIFO produces the lowest gross profit (3,000) compared to FIFO (10,000) — under inflation, LIFO reduces tax liability by 30-70% (the very reason the US keeps it).
- LIFO's Balance Sheet inventory holds very old prices (33,000) while the current market price is 220 THB/bag — true value is closer to 44,000. This is a major distortion of reality.
Why LIFO Lowers Tax Under Inflation
Simple logic: tax is based on profit; profit is Revenue − COGS. So higher COGS = lower profit = lower tax.
Under inflation, newer purchase prices always exceed older ones. LIFO selects the newer, more expensive cost as COGS, automatically producing higher COGS than FIFO/WMA. Over time, the LIFO Reserve (the gap relative to FIFO) accumulates into billions of dollars for large corporations — for example, ExxonMobil reported a LIFO Reserve of roughly $15-20 billion during periods of high oil prices (essentially "deferred" tax).
3 Reasons IFRS / TFRS Banned LIFO
| Reason | Explanation |
|---|---|
| 1. Doesn't reflect real inventory flow | No real warehouse pulls the newest stock first — especially for food, pharmaceuticals, or chemicals where older stock would expire. FIFO is much closer to reality. LIFO is purely an accounting fiction that does not match physical behaviour. |
| 2. Balance Sheet distortion | Because LIFO leaves old lots untouched, Inventory on the Balance Sheet can carry decades-old prices ("LIFO Liquidation Layers"), making readers underestimate the true asset value. |
| 3. Open invitation to manipulate profits | Companies can "manage earnings" using LIFO — selling deep through the old layer ("LIFO Liquidation") drags out cheap historical costs to inflate profits, while ordering an expensive last lot late in the year suppresses them. Pure window-dressing potential. |
Global Timeline — How LIFO Was Phased Out
- 1973-1976: IASC (the precursor to IFRS) issued the original IAS 2; LIFO was still permitted.
- 2003: IASB revised IAS 2 — LIFO was banned outright, effective from 2005.
- 2009: Thailand adopted IAS 2 as TAS 2 through the Federation of Accounting Professions, banning LIFO domestically.
- 2011: The latest revision of TAS 2 retains the LIFO ban.
- 2025: US GAAP remains the only major framework that still permits LIFO (multiple FASB proposals to remove it have stalled due to oil/gas industry lobbying).
Why US GAAP Still Allows LIFO — And What "LIFO Reserve" Is
The United States is the only country still permitting LIFO, due to a tax rule called the "LIFO Conformity Rule": if a company uses LIFO for tax reporting, it must also use LIFO in its financial statements. As a result, large corporations (oil & gas, chemicals, manufacturing) that benefit from LIFO tax treatment lobby aggressively against any FASB proposal to drop it.
To compensate for the Balance Sheet distortion, US-GAAP companies using LIFO must disclose a "LIFO Reserve" in the Notes to Financial Statements. This figure is the gap between LIFO inventory and what the inventory would be under FIFO. Readers can add LIFO Reserve back to estimate the "true" inventory value.
True Inventory Value (close to market) ≈ LIFO Inventory + LIFO Reserve
Impact on Thai Organizations
- Typical Thai companies: Cannot use LIFO in financial statements under TFRS. The choice is FIFO, WMA, or Specific Identification.
- Thai companies with US subsidiaries: The subsidiary may use LIFO under US GAAP, but consolidated financial statements must convert to FIFO/WMA first (LIFO-to-FIFO Adjustment) before being included.
- Thai companies listed on NYSE/NASDAQ: May report under US GAAP, but must reconcile to IFRS if investors request.
- ERP users in Thailand: Most ERP systems sold in Thailand do not offer LIFO as a costing method, since it cannot be used legally. Saeree ERP follows the same approach — it supports only FIFO and WMA.
LIFO in Saeree ERP — Intentionally Not Supported
Saeree ERP deliberately does not support LIFO, in line with TFRS which prohibits it for Thai financial statements. Rather than offering an option that cannot be used legally, Saeree ERP focuses on making FIFO and WMA precise and comprehensive across every scenario.
If your organization handles a mix of inventory types, Saeree ERP supports per-category and per-warehouse costing methods — for example, general goods on WMA and pharmaceuticals/food on FIFO for expiry tracking — fully compliant with TAS 2 without losing flexibility.
